I suppose this goes without saying, but there’s still a lot of angst out there regarding international investors’ alleged trepidation towards US assets and the US dollar itself.

I’ve been over this and over it since “Liberation Day,” but because it keeps coming up in top-tier research (where that just means sell-side notes from the largest five banks), I feel compelled to keep it front and center.

The question, in a nutshell, is this: Has the appeal of US assets to foreign investors waned in light of Donald Trump’s determination that not a day should pass without The White House threatening a sacred cow?

Nothing’s sacrosanct with Trump. Not NATO Article 5, not due process in the American justice system, not Fed independence, not even the Good Book itself, which Trump monetizes every, single day via his “God Bless The USA” Bible business.

On some interpretations, flows to US equities and fixed income have dried up or are in the process of drying up. And as Deutsche Bank’s George Saravelos noted earlier this week, “Foreigners don’t need to sell US assets to weaken the dollar, but merely to say ‘no thank you’ to buying more.”

It’s notable in that context that the dollar continues to exhibit a positive correlation with US equities, as illustrated in the chart below from Morgan Stanley’s FX team.

If the dollar’s no longer a natural hedge for US stocks, foreign holders have an incentive to hedge that exposure, and those hedges will generally become cheaper — i.e., even more attractive — assuming rate differentials narrow going forward.

The now positive correlation between the dollar and stocks “means that USD moves would amplify, rather than dampen, volatility,” Morgan Stanley analysts including David Adams and James Lord wrote, in a note dated July 1, adding that an “uptick in asset (and FX) vol, coupled with the uptick in uncertainty, widens the distribution of outcomes for investors, raising the benefit of hedging.”

This matters because although most European exposure to US fixed income is hedged, the vast majority of US equities exposure isn’t.

The figure on the left, above, shows those hedge ratios, while the figure on right gives you a sense of size. Some $3.3 trillion of European exposure to US stocks is unhedged currently.

In the event the hedge ratio for foreign-held US equities increases going forward (and, again, there’s a lot of room for that), the dollar’s “discount to fundamentally-implied fair value” would increase, Morgan Stanley’s team wrote.

It’s also possible that US corporates, expecting a weaker dollar, will shift their own hedging strategies. “If corporates are hedging less, that is less dollar demand in the market than if they kept their ratios elevated,” the bank went on. “Less dollar demand naturally creates a weaker USD.”

At the same time, there’s a fundamentals-based case for ongoing dollar weakness. The US economy’s decelerating and the Fed’s poised to start cutting again, maybe as early as this month. So, growth and rate differentials are both set to compress going forward, which could (and should, from a textbook perspective) put additional pressure on the greenback.

Finally, Morgan Stanley’s team suggested the self-fulfilling prophecy that drove the USD to dominate global bond and equity benchmarks over the last decade and half may soon go “into reverse.” Looking ahead, the bank wrote, “a weaker USD [may] caus[e] lower weights for US markets within global benchmarks and then fewer capital inflows to the US economy.”

As you can probably surmise, Morgan Stanley expects the dollar to extend its drop. Any stabilization in the near-term would be an “intermission, not the finale,” the bank said.

Of course, dollar depreciation needn’t necessarily be a bad thing. It’s a boon to exporters and to US multinationals, for example, and so could actually benefit US stocks.

The problem from my perspective is that so much of this debate comes back, one way or another, to the kinds of existential questions no one wants to ponder. As Morgan Stanley put it, there are “continued debates around USD’s safe-haven status.”

That’s not a discussion anyone should be having, and the fact that it’s up for debate is a damning indictment of Trump’s policy agenda and the way in which he conducts America’s affairs.